The Wet Seal, Inc. (Nasdaq:WTSL), a leading specialty retailer to young women, today announced financial results for the third quarter ended November 2, 2013, and provided its financial outlook for the fourth quarter of fiscal 2013.

Third Quarter Fiscal 2013:
  • Net sales totaled $127.7 million versus net sales of $135.5 million in the third quarter of 2012.
  • Consolidated comparable store sales increased 0.8%, including an increase of 1.7% at Wet Seal and a decrease of 6.7% at Arden B.
  • Gross profit increased 11% to $28.9 million compared to $26.0 million a year ago, while gross margin expanded 350 basis points to 22.7% of sales versus 19.2% of sales in the third quarter of 2012. The year-over-year increase is primarily attributable to substantial improvement in merchandise margin due to reduced markdown levels, despite the highly promotional retail environment.
  • Operating loss was $14.9 million compared to operating loss of $24.8 million in the third quarter of fiscal 2012. The current year and prior year quarters include $5.1 million and $6.5 million, respectively, of non-cash asset impairment charges. Operating loss in the prior year period also includes $2.1 million in professional fees to defend against a proxy solicitation. Non-GAAP adjusted operating loss, excluding the effect of the aforementioned charges, was $9.8 million in the third quarter of fiscal 2013 compared to non-GAAP adjusted operating loss of $16.2 million in the prior year period.
  • Provision for income taxes was $0.1 million compared to a benefit for income taxes of $10.0 million in the prior year quarter. The Company ceased recording benefits for income taxes on pre-tax losses upon establishing a valuation allowance against its deferred tax assets at the end of fiscal 2012.
  • Net loss totaled $14.9 million, or $0.18 per diluted share, compared to net loss of $14.8 million, or $0.17 per diluted share, in the prior year quarter. Non-GAAP adjusted net loss in the third quarter of fiscal 2013, excluding the after-tax effect of non-cash asset impairment charges, totaled $9.9 million, or $0.12 per diluted share. Non-GAAP adjusted net loss in the third quarter of fiscal 2012, excluding the after-tax effect of non-cash asset impairment charges, and proxy solicitation costs, was $9.7 million, or $0.11 per diluted share.
  • At quarter end, the Company’s inventory per square foot was down 5% versus a year ago, including a decrease of 3% at Wet Seal and 20% at Arden B.
  • As of November 2, 2013, the Company remained in strong financial condition, with $65.9 million of cash and cash equivalents and no debt. Merchandise inventories totaled $42.6 million compared to $46.2 million a year ago.

“During the third quarter, we reduced markdown levels versus last year and closely managed inventories, despite considerable softening of mall traffic as the period progressed,” said John D. Goodman, Chief Executive Officer. “Our disciplined approach enabled us to achieve an increase of 350 basis points in gross margin, with slightly positive comp store sales. At the same time, we maintained tight control over expenses, resulting in a decrease in SG&A as a percentage of sales year-over-year.”

Goodman continued, “We believe the business is well-positioned for holiday with on trend merchandise assortments, innovative marketing programs and an enhanced e-commerce site that has significantly improved the customer shopping experience. Nevertheless, we’ve had a challenging start to the season, reflecting the difficult macro environment and ongoing softness in mall traffic, which is causing us to maintain a cautious outlook for the remainder of the year.”

Real Estate

During the third quarter of fiscal 2013, the Company opened 10 and closed 3 Wet Seal stores and closed 2 Arden B stores. The Company expects to open an additional 13 new Wet Seal locations in the fourth quarter and is on track to complete a total of 26 new store openings in fiscal 2013.

Fourth Quarter Fiscal 2013 Financial Outlook

For the fourth quarter of fiscal 2013, the Company estimates net loss per diluted share in the range of $0.14 to $0.17.

The financial outlook is based on the following assumptions:
  • Total net sales between $134 million and $137 million versus $161.7 million in the fourth quarter of fiscal 2012. This year is a 13 week quarter compared to a 14 week quarter in the prior year.
  • Comparable store sales decrease in the high single digits to low double digits.
  • Gross margin rate between 21.9% and 23.2% of net sales versus 24.8% in the prior year quarter.
  • SG&A expense between 31.7% and 32.4% of net sales versus 35.6% in the prior year quarter. The prior year quarter included a $6.6 million charge to accrue loss contingencies for several litigation matters, a $0.2 million benefit to adjust the amount of professional fees incurred to defend against a shareholder proxy solicitation to replace certain of the Company's board members, $1.3 million in severance charges for a previously announced workforce reduction, and a $0.5 million charge for the early termination of two investment banker retention agreements.
  • Operating loss ranging from $11.6 million to $14.1 million. In the fourth quarter of fiscal 2012, operating loss was $25.5 million, including $8.0 million in non-cash asset impairment charges and the aforementioned charges and benefits.
  • Four net store openings at Wet Seal and two store closings at Arden B.
  • Weighted-average diluted shares outstanding of approximately 84 million shares.

For full year fiscal 2013, the Company expects to have a net seven store increase in the Wet Seal store count and five Arden B store closings. The Company forecasts fiscal 2013 net capital expenditures will be approximately $22 million to $23 million, of which approximately $15 million to $16 million will be for construction of new stores or remodeling of existing stores upon lease renewals and/or store relocations.

Conference Call

The Company will host a conference call and question and answer session at 2:00 p.m. Pacific Time today. To participate in the conference call, please dial 877-407-3982 or 201-493-6780. A broadcast of the call will also be available on the Company’s website, www.wetsealinc.com. A replay of the call will be available through December 18, 2013. To access the replay, please call (877) 870-5176 or (858) 384-5517 and provide ID number 10000558.

About The Wet Seal, Inc.

Headquartered in Foothill Ranch, California, The Wet Seal, Inc. is a leading specialty retailer of fashionable and contemporary apparel and accessory items. As of November 2, 2013, the Company operated a total of 530 stores in 47 states and Puerto Rico, including 471 Wet Seal stores and 59 Arden B stores. The Company's products can also be purchased online at www.wetseal.com or www.ardenb.com. For more Company information, visit www.wetsealinc.com.

Safe Harbor

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This news release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that relate to the Company's financial outlook for its fourth quarter of fiscal 2013, its store opening and capital spending plans for all of fiscal 2013, and its merchandising and other strategic actions plans, or any other statements that relate to the intent, beliefs, plans or expectations of the Company or its management. All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. This news release contains results reflecting partial year data and non-fiscal data that may not be indicative of results for similar future periods or for the full year. The Company will not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Exhibit A
 
The Wet Seal, Inc.
Condensed Consolidated Balance Sheets

(000’s Omitted)

(Unaudited)
 
  November 2,   February 2,   October 27,
2013 2013   2012
ASSETS
Cash and cash equivalents $ 30,084 $ 42,279 $ 126,343
Short-term investments 35,812 67,694 -
Merchandise inventories 42,587 33,788 46,193
Other current assets 16,110 15,467 7,791
Deferred taxes   -   -   20,133
 
Total current assets 124,593 159,228 200,460
Net equipment and leasehold improvements 64,919 64,225 73,828
Deferred taxes - - 41,766
Other assets   2,003   3,053   3,069
 
Total assets $ 191,515 $ 226,506 $ 319,123
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable – merchandise $ 24,623 $ 16,978 $ 28,128
Accounts payable – other 11,361 18,116 13,369
Accrued liabilities 24,203 26,347 24,000
Current portion of deferred rent   3,909   2,289   2,456
 
Total current liabilities 64,096 63,730 67,953
Deferred rent 31,092 32,136 33,378
Other long-term liabilities   1,796   1,908   1,820
 
Total liabilities 96,984 97,774 103,151
Total stockholders’ equity   94,531   128,732   215,972
 
Total liabilities and stockholders’ equity $ 191,515 $ 226,506 $ 319,123
 

Exhibit A (Continued)
 
The Wet Seal, Inc.
Condensed Consolidated Statements of Operations

(000’s Omitted, Except Share Data)

(Unaudited)
 
  13 Weeks Ended   39 Weeks Ended
November 2,   October 27,   November 2,   October 27,
  2013       2012       2013       2012  
Net sales $ 127,664 $ 135,537 $ 405,358 $ 418,743
Gross margin 28,949 26,045 111,832 100,450
Selling, general & administrative expenses 38,743 44,405 115,592 126,215
Asset impairment   5,061       6,456       6,919       19,035  
Operating loss (14,855 ) (24,816 ) (10,679 ) (44,800 )
Interest expense, net   (6 )     (10 )     (13 )     (28 )
Loss before provision (benefit) for income taxes (14,861 ) (24,826 ) (10,692 ) (44,828 )
Provision (benefit) for income taxes   49       (10,047 )     150       (17,407 )
Net loss $ (14,910 )   $ (14,779 )   $ (10,842 )   $ (27,421 )
Weighted average shares, basic 83,729,646 88,877,993 86,028,985 88,650,011
Net loss per share, basic $ (0.18 ) $ (0.17 ) $ (0.13 ) $ (0.31 )
Weighted average shares, diluted 83,729,646 88,877,993 86,028,985 88,650,011
Net loss per share, diluted $ (0.18 ) $ (0.17 ) $ (0.13 ) $ (0.31 )
 

Exhibit A (continued)
 
The Wet Seal, Inc.
Consolidated Statements of Cash Flows

(000’s Omitted)

(Unaudited)
 
  39 Weeks Ended
November 2,   October 27,
  2013     2012  
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (10,842 ) $ (27,421 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,198 13,531
Amortization of premium on investments 123 -
Amortization of deferred financing costs 81 81
Asset impairment 6,919 19,035
Loss on disposal of equipment and leasehold improvements 83 550
Deferred income taxes - (17,986 )
Stock-based compensation 1,212 2,596
Changes in operating assets and liabilities:
Income taxes receivable 145 (460 )
Other receivables 79 (17 )
Merchandise inventories (8,799 ) (14,359 )
Prepaid expenses and other assets 73 (1,180 )
Other non-current assets 29 (7 )
Accounts payable and accrued liabilities (3,295 ) 11,767
Deferred rent 576 182
Other long-term liabilities   (112 )   (104 )
Net cash used in operating activities   (3,530 )   (13,792 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (15,853 ) (16,775 )
Investment in marketable securities (9,500 ) -
Proceeds from maturity of marketable securities   41,259     -  
Net cash provided by (used in) investing activities   15,906     (16,775 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 747 19
Repurchase of common stock   (25,318 )   (294 )
Net cash used in financing activities   (24,571 )   (275 )
 
DECREASE IN CASH AND CASH EQUIVALENTS (12,195 ) (30,842 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   42,279     157,185  
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,084   $ 126,343  
 

Exhibit B
 

Segment Reporting (Unaudited)

The Company operates exclusively in the retail apparel industry in which it sells fashionable and contemporary apparel and accessories items, primarily through mall-based chains of retail stores, to female consumers with a young, active lifestyle. The Company has identified two operating segments (“Wet Seal” and “Arden B”) as defined under applicable accounting standards. E-commerce operations for Wet Seal and Arden B are included in their respective operating segments. Information for the 13 and 39 weeks ended November 2, 2013, and October 27, 2012, for the two reportable segments is set forth below (in thousands, except number of stores as of period end and sales per square foot):
 
Thirteen Weeks Ended November 2, 2013   Wet Seal   Arden B   Corporate   Total
Net sales   $ 114,878   $ 12,786   n/a   $ 127,664
% of total sales 90 % 10 % n/a 100 %
Comparable store sales % increase (decrease) 1.7 % (6.7 )% n/a 0.8 %
Operating loss $ (4,575 ) $ (2,427 ) $ (7,853 ) $ (14,855 )
Interest expense, net $ - $ - $ (6 ) $ (6 )
Loss before provision for income taxes $ (4,575 ) $ (2,427 ) $ (7,859 ) $ (14,861 )
Depreciation $ 2,615 $ 304 $ 504 $ 3,423
Number of stores as of period end 471 59 n/a 530
Sales per square foot $ 58 $ 61 n/a $ 59
Square footage as of period end 1,881 183 n/a 2,064
 
Thirteen Weeks Ended October 27, 2012   Wet Seal   Arden B   Corporate   Total
Net sales $ 117,892 $ 17,645 n/a $ 135,537
% of total sales 87 % 13 % n/a 100 %
Comparable store sales % decrease (13.5 )% (13.8 )% n/a (13.5 )%
Operating loss $ (8,747 ) $ (3,733 ) $ (12,336 ) $ (24,816 )
Interest expense, net $ - $ - $ (10 ) $ (10 )
Loss before benefit for income taxes $ (8,747 ) $ (3,733 ) $ (12,346 ) $ (24,826 )
Depreciation $ 3,442 $ 404 $ 422 $ 4,268
Number of stores as of period end 472 81 n/a 553
Sales per square foot $ 59 $ 63 n/a $ 59
Square footage as of period end 1,885 251 n/a 2,136
 
Thirty-Nine Weeks Ended November 2, 2013   Wet Seal   Arden B   Corporate   Total
Net sales $ 358,245 $ 47,113 n/a $ 405,358
% of total sales 88 % 12 % n/a 100 %
Comparable store sales % increase (decrease) 0.6 % (1.0 )% n/a 0.4 %
Operating income (loss) $ 13,928 $ (1,380 ) $ (23,227 ) $ (10,679 )
Interest expense, net $ - $ - $ (13 ) $ (13 )
Income (loss) before provision for income taxes $ 13,928 $ (1,380 ) $ (23,240 ) $ (10,692 )
Depreciation $ 7,934 $ 882 $ 1,382 $ 10,198
Sales per square foot $ 183 $ 219 n/a $ 186
 
Thirty-Nine Weeks Ended October 27, 2012   Wet Seal   Arden B   Corporate   Total
Net sales $ 357,806 $ 60,937 n/a $ 418,743
% of total sales 85 % 15 % n/a 100 %
Comparable store sales % decrease (10.5 )% (12.2 )% n/a (10.7 )%
Operating loss $ (8,003 ) $ (6,614 ) $ (30,183 ) $ (44,800 )
Interest expense, net $ - $ - $ (28 ) $ (28 )
Loss before benefit for income taxes $ (8,003 ) $ (6,614 ) $ (30,211 ) $ (44,828 )
Depreciation $ 11,022 $ 1,314 $ 1,195 $ 13,531
Sales per square foot $ 180 $ 214 n/a $ 184
 

Exhibit B (Continued)
 
The “Corporate” column is presented solely to allow for reconciliation of store contribution amounts to consolidated operating loss, interest expense, net, and loss before provision (benefit) for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense.
 
Wet Seal operating segment results during the 13 and 39 weeks ended November 2, 2013, and October 27, 2012, include $4.8 million, $6.1 million, $5.8 million and $16.3 million, respectively, of asset impairment charges.
 
Arden B operating segment results during the 13 and 39 weeks ended November 2, 2013, and October 27, 2012, include $0.3 million, $0.8 million, $0.7 million and $2.7 million, respectively, of asset impairment charges.
 
Corporate expenses during the 13 and 39 weeks ended October 27, 2012, include $0.1 million and $2.0 million of severance cost resulting from the departure of the Company’s previous chief executive officer. Corporate expenses during the 13 and 39 weeks ended October 27, 2012, include $2.1 million in professional fees to defend against a shareholder proxy solicitation to replace a majority of the Company’s board members.
 

Exhibit C
 

Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable Financial Measures (Unaudited)
 

Included within this press release are references to non-GAAP financial measures (“non-GAAP” or “adjusted”), including operating loss, net loss and net loss per diluted share before certain charges. These financial measures are not in compliance with U.S. generally accepted accounting principles (“GAAP”) and are not necessarily comparable to similar measures presented by other companies. The Company believes that this non-GAAP information is useful as an additional means for investors to evaluate the Company's operating performance, when reviewed in conjunction with GAAP financial statements. These amounts are not determined in accordance with GAAP and therefore should not be used exclusively in evaluating the Company's business and operations. For further information, see “Company Statement on Disclosure of Non-GAAP Financial Measures” within the Investor Relations section of the Company's corporate web site, www.wetsealinc.com.
 

The following is a reconciliation of the applicable GAAP financial measures to the non-GAAP financial measures (in millions, except for net loss per diluted share):
 

 
  13 Weeks Ended   13 Weeks Ended
November 2, 2013 October 27, 2012
        Net Loss
Net Loss Per
Operating Per Diluted Operating Diluted
Loss   Net Loss   Share   Loss   Net Loss   Share
 
GAAP financial measure

$

(14.9

)
$ (14.9 ) $ (0.18 )

$

(24.8

)
$ (14.8 ) $ (0.17 )
Charges:
Proxy solicitation costs, net of income taxes - - - 2.1 1.3 0.01
Non-cash asset impairment charges, net of income taxes   5.1       5.0       0.06     6.5       3.8       0.05  
 
Non-GAAP financial measures

$

(9.8

)
  $ (9.9 )   $ (0.12 )

$

(16.2

)
  $ (9.7 )   $ (0.11 )
 

During the prior year third quarter, the Company engaged in a defense against a shareholder proxy solicitation that sought to replace a majority of the Company’s board members, incurring professional fees of $2.1 million in this effort. The proxy solicitation ultimately led to an agreement to replace four of the Company’s seven board members during the quarter. Given the unique nature of this corporate governance event and the magnitude of professional fees incurred, the Company believes the presentation of its historical financial information excluding these non-cash charges to be beneficial to its investors.
 

From time to time, the Company determines the carrying values of certain of its long-lived assets are not supported by their anticipated future cash flows and, as a result, must record non-cash charges to impair these assets. The timing and magnitude of these charges can be sporadic, thus significantly affecting the reported financial results of the fiscal period in which they are recorded. Given the unique nature and sporadic timing of these charges, the Company consistently presents these charges as a separate line item within its statements of operations and, similarly, believes the presentation of its historical financial information excluding these non-cash charges to be beneficial to its investors.

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